What Happened
The S&P 500 fell into “correction” territory (a drop of 10% from a recent peak) as markets continue to worry that uncertainties and potential inflation due to tariffs and the administration’s heavy-handed job and spending cuts will weigh on economic growth and, in turn, on corporate earnings. Wall Street analysts have begun reducing their economic growth forecasts as they fear that weak consumer and business sentiment will eventually manifest in actual reductions in consumer spending and business investment. These fears also spread into credit markets, with high-yield bond spreads widening 30 bps last week.
What We Are Watching
Fed Meeting: All eyes are on the Federal Reserve this week, with the central bank scheduled to deliver its second interest rate decision of the year. Markets expect the Fed to keep rates steady, and the real focus will be on the updated dot plot and Chairman Jerome Powell’s press conference. The market’s real concern here is that sticky inflation means that the Fed may be unable to assist in slowing economic growth by cutting rates further; Chairman Powell’s commentary may yield clues as to how the Fed intends to navigate between its two mandates of stable inflation and maximum employment.
Signs of Further Market Stress: High yield bond spreads are 34bps wider YTD but, at 321bps remain at low absolute levels relative to their 20-year average of 491. A level above 400 may signal further market turbulence. Similarly, while the VIX has risen from its year-end level of 17 to the 22-23 level currently, a spike above 30 would be worth paying attention to.
Corporate Earnings: Analysts have yet to cut earnings estimates of any significance; Wall St.’s earnings expectations for 2025 are down <1% currently ($272/share to $270/share) from the start of the year. A change in earnings expectations will determine whether the current growth scare has been priced in or has more room to run.
How To Invest
Stay Invested: Market volatility is normal; an average year sees a market drawdown of at least 15% while finishing the year up ~70% of the time. While the recent market correction was one of its quickest (17 trading sessions), year-to-date the S&P 500 index is down only 3.9%.
Diversify: The investment office recently reduced its overweight to U.S. equities and added to non-U.S. developed market equities, where valuations are cheaper, the indexes are less concentrated and earnings may have tailwinds from a spending boost related to defense and energy security.
Reduce Portfolio Concentration: Many client portfolios include large positions in some of the large-cap technology stocks that have driven the market over the past two years. These stocks have recently performed worse than the market – the “Magnificent 7” stocks, in aggregate, are down 14% YTD vs. 4% for the S&P 500. Clients should look at potential solutions to reduce these concentrations in a tax-efficient manner.
Market Performance
Equities
The S&P 500 returned -2.2% as uncertainty over tariffs and weak economic data continued to roil markets; the index briefly entered ‘correction’ territory (down 10% from a recent peak) before rebounding on Friday. While two sets of inflation data came in better than expected, consumer sentiment soured in the latest University of Michigan survey. Consumer staples (-4.2%) and consumer discretionary (-3.6%) were the worst-performing sectors in the S&P 500; energy (+2.6%) and utilities (+2.0%) were the only sectors with positive performance. EAFE markets returned -1.1%; EM markets returned -0.7%, with Brazil rising +4.0%.
From a valuation perspective, U.S. large caps trade above +1 standard deviation based on historical forward P/E ratios with the S&P 500 at +1.5. The NASDAQ is at +0.6. For the next 12 months, EPS growth for the S&P 500 is expected to be 10.0% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 17.7% (vs. 10.7% annualized over the last 20 years). All U.S. indices, including the S&P 500 (US Large Cap), NASDAQ, Russell Midcap (US Midcap), and the Russell 2000 (US Small Cap) trade at or above their 20-year averages based on forward P/E ratios while the MSCI EAFE (Non-US Developed Market Equities) and MSCI EM (EM Equities) are inline.
Fixed Income
Investment-grade fixed-income sectors had negative returns as spreads widened while rates remained mostly steady. Municipals returned -0.7%, US AGG returned -0.1%, and U.S. IG returned -0.3%. HY bond returned -0.7% as spreads widened 30bps while bank loans returned -0.3%. EM debt returned -0.2% as the U.S. dollar fell 0.1%.
Rates
Rates rose and edged up slightly across the curve. The recession-watch 3M-10Y spread compressed 2bps to +2bps and flirts with inversion. The 2Y-10Y spread compressed 1bp to +29. Rates continued to rise in Europe and the U.K. as governments looked to boost borrowing and spending. The BTP-Bund spread is at 1.12%. 5-year breakeven inflation expectations fell 4bps to 2.53% (vs. a low of 1.88% on Sept 10); 10-year breakeven inflation expectations fell 4bps to 2.31% (vs. recent low of 2.03% on Sept 10); the 10Y real yield rose 5bps to 2.00%. The market now expects between two and three cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.7% vs. the Fed’s guidance of 3.75%-4.00%.
Currencies/Commodities
The dollar index fell 0.1%. The commodities complex rose 0.1%, while energy prices fell 0.5% for the week. Brent prices were slightly higher at $71/bbl. U.S. natural gas prices fell 6.7% while European gas rose 5.8%, both due to weather forecasts.
Market monitors
Volatility was mostly flat for equities and for bonds (VIX = 22, MOVE = 101); the 10-year average for each is VIX=18, MOVE = 78. Market sentiment (at midweek) remained negative at -40.
Weekly Commentary
Investment Commentary – March 17, 2025
What Happened
The S&P 500 fell into “correction” territory (a drop of 10% from a recent peak) as markets continue to worry that uncertainties and potential inflation due to tariffs and the administration’s heavy-handed job and spending cuts will weigh on economic growth and, in turn, on corporate earnings. Wall Street analysts have begun reducing their economic growth forecasts as they fear that weak consumer and business sentiment will eventually manifest in actual reductions in consumer spending and business investment. These fears also spread into credit markets, with high-yield bond spreads widening 30 bps last week.
What We Are Watching
Fed Meeting: All eyes are on the Federal Reserve this week, with the central bank scheduled to deliver its second interest rate decision of the year. Markets expect the Fed to keep rates steady, and the real focus will be on the updated dot plot and Chairman Jerome Powell’s press conference. The market’s real concern here is that sticky inflation means that the Fed may be unable to assist in slowing economic growth by cutting rates further; Chairman Powell’s commentary may yield clues as to how the Fed intends to navigate between its two mandates of stable inflation and maximum employment.
Signs of Further Market Stress: High yield bond spreads are 34bps wider YTD but, at 321bps remain at low absolute levels relative to their 20-year average of 491. A level above 400 may signal further market turbulence. Similarly, while the VIX has risen from its year-end level of 17 to the 22-23 level currently, a spike above 30 would be worth paying attention to.
Corporate Earnings: Analysts have yet to cut earnings estimates of any significance; Wall St.’s earnings expectations for 2025 are down <1% currently ($272/share to $270/share) from the start of the year. A change in earnings expectations will determine whether the current growth scare has been priced in or has more room to run.
How To Invest
Stay Invested: Market volatility is normal; an average year sees a market drawdown of at least 15% while finishing the year up ~70% of the time. While the recent market correction was one of its quickest (17 trading sessions), year-to-date the S&P 500 index is down only 3.9%.
Diversify: The investment office recently reduced its overweight to U.S. equities and added to non-U.S. developed market equities, where valuations are cheaper, the indexes are less concentrated and earnings may have tailwinds from a spending boost related to defense and energy security.
Reduce Portfolio Concentration: Many client portfolios include large positions in some of the large-cap technology stocks that have driven the market over the past two years. These stocks have recently performed worse than the market – the “Magnificent 7” stocks, in aggregate, are down 14% YTD vs. 4% for the S&P 500. Clients should look at potential solutions to reduce these concentrations in a tax-efficient manner.
Market Performance
Equities
The S&P 500 returned -2.2% as uncertainty over tariffs and weak economic data continued to roil markets; the index briefly entered ‘correction’ territory (down 10% from a recent peak) before rebounding on Friday. While two sets of inflation data came in better than expected, consumer sentiment soured in the latest University of Michigan survey. Consumer staples (-4.2%) and consumer discretionary (-3.6%) were the worst-performing sectors in the S&P 500; energy (+2.6%) and utilities (+2.0%) were the only sectors with positive performance. EAFE markets returned -1.1%; EM markets returned -0.7%, with Brazil rising +4.0%.
From a valuation perspective, U.S. large caps trade above +1 standard deviation based on historical forward P/E ratios with the S&P 500 at +1.5. The NASDAQ is at +0.6. For the next 12 months, EPS growth for the S&P 500 is expected to be 10.0% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 17.7% (vs. 10.7% annualized over the last 20 years). All U.S. indices, including the S&P 500 (US Large Cap), NASDAQ, Russell Midcap (US Midcap), and the Russell 2000 (US Small Cap) trade at or above their 20-year averages based on forward P/E ratios while the MSCI EAFE (Non-US Developed Market Equities) and MSCI EM (EM Equities) are inline.
Fixed Income
Investment-grade fixed-income sectors had negative returns as spreads widened while rates remained mostly steady. Municipals returned -0.7%, US AGG returned -0.1%, and U.S. IG returned -0.3%. HY bond returned -0.7% as spreads widened 30bps while bank loans returned -0.3%. EM debt returned -0.2% as the U.S. dollar fell 0.1%.
Rates
Rates rose and edged up slightly across the curve. The recession-watch 3M-10Y spread compressed 2bps to +2bps and flirts with inversion. The 2Y-10Y spread compressed 1bp to +29. Rates continued to rise in Europe and the U.K. as governments looked to boost borrowing and spending. The BTP-Bund spread is at 1.12%. 5-year breakeven inflation expectations fell 4bps to 2.53% (vs. a low of 1.88% on Sept 10); 10-year breakeven inflation expectations fell 4bps to 2.31% (vs. recent low of 2.03% on Sept 10); the 10Y real yield rose 5bps to 2.00%. The market now expects between two and three cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.7% vs. the Fed’s guidance of 3.75%-4.00%.
Currencies/Commodities
The dollar index fell 0.1%. The commodities complex rose 0.1%, while energy prices fell 0.5% for the week. Brent prices were slightly higher at $71/bbl. U.S. natural gas prices fell 6.7% while European gas rose 5.8%, both due to weather forecasts.
Market monitors
Volatility was mostly flat for equities and for bonds (VIX = 22, MOVE = 101); the 10-year average for each is VIX=18, MOVE = 78. Market sentiment (at midweek) remained negative at -40.
Disclosure and Source
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